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Fraser Limited is considering a capital project requiring an outlay of $15 million. It is expected to generate a net cash inflow of $3,75 million for 6 years. The opportunity cost of capital is 18%. Fraser Limited can raise a term loan of $10 million for the project. The term loan will carry an interest rate of 16% and would be repayable in 5 equal annual installments, the first installment falling due at the end of the second year. The balance amount required for the project can be raised by issuing equity. The issue cost is expected to be 8%. The tax rate for the company is 50%.
Required:
(i) Calculate the base case NPV
(ii) Determine the adjusted net present value. (10 marks)
You must have an answer to this in the same book in which you found the question, so ask about whatever it is in the answer that you are not clear about – then I will explain.
(If you do not have an answer because you have been given the question as an assignment, then obviously we do not do your homework for you 🙂 )
I do assume that you have watched my free lectures on APV?